Razorfish downgraded, analysts see cash crunch ahead

Razorfish (Nasdaq: RAZF) plunged 35 percent Wednesday as analysts downgraded it following a fourth quarter warning, citing the firm's refusal to cut jobs and animpending cash crunch.

Shares in the company were down 1.09 to 2. Shortly after missing its third quarter, Razorfish lowered guidance for its fourth quarter, citing lengthening sales cycles and a general slowing in technology spending. In recent weeks, competitors Scient (Nasdaq: SCNT), IXL Enterprises (Nasdaq: IIXL), and Lante (Nasdaq: LNTE) have also announced shortfalls.

Analyst Vincent Colicchio at Southwest Securities downgraded the stock to "neutral" from "accumulate," and lowered earnings and revenue estimates for fiscal 2001.

"We believe that the company will have difficulty retaining both technology and creative design professionals given the weakening in the business pipeline and the likelihood of continued weakness in stock price performance," Colicchio stated in a research note.

Given management's commitment not to make significant employee cuts, the analyst said he expects the company's financial position to further deteriorate over the next few quarters.

Despite a cash balance of $84.1 million at the close of (the third quarter), our estimated cash burn rate of $30 million per quarter for the next few quarters is a cause for concern," Colicchio added.

Morgan Stanley analyst Robert St. Jean downgraded the stock to "long-term buy" from "buy" and lowered estimates

"The rationale for lowering our rating now is based on our view that the company does not appear to be taking sufficient steps to reduce its cost structure in the facing of rapidly contracting demand," St Jean stated in his research note.

"We believe the substantial revenue shortfall calls into question the company's ability to accurately forecast near-term demand and manage resources appropriately," the analyst added.

Compared to competitors, St. Jean said the "magnitude of the Razorfish's shortfall (is) surprising," and added he believes the company will become cash constrained later in mid-2001 depending on a number of factors including management's decisions concerning staffing levels.

Along with Sapient (Nasdaq: SAPE), marchFIRST (Nasdaq: MRCH) and Proxicom (Nasdaq: XCM), St. Jean said, the company "has long term potential because of the strength of their brand in the Internet services marketplace. ... We ultimately believe the Internet services market will see renewed growth, and that the sector has room for multiple successful firms."

However, he sees a prolonged downturn in corporate IT investment, which should last into mid-2001.

SG Cowen analyst Moshe Katri also downgraded the stock to "neutral," finding the company's lack of staff reductions "odd" and anticipating a cash crunch.

Katri did not change estimates, and is awaiting an update during the company's earnings call in January.

On the bright side, Katri noted that CEO Jeff Dachis said he expects the market to rebound within the next three months or so and that the company will need its full consultant base.
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